Microsoft wins -- or does it?

Experts and observers analyze the appeals court's ruling in the antitrust case.

June 28, 2001 10:05PM (UTC)

Lawrence Lessig, professor at Stanford Law School, who served as the court's "special master" in the Microsoft case:

Microsoft lost on every hard question; they won on every easy question. The court has found them liable for monopoly maintenance. That's the essence of the government's case. The court has also found that it did not decide in 1998 that tying software would be decided under a different standard. That was the essence of Microsoft's defense. The court has crafted a smart and innovative rule about the special problem of tying software. But even if Microsoft won in the application of that rule on remand, the core of the case is that Microsoft has lost. They violated the antitrust laws, and the real issue is now remedy.

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Richard McKenzie, author of "Trust on Trial: How the Microsoft Case is Reframing the Rules of Competition":

On the one hand, Microsoft might be able to celebrate because the court's eliminated the threat of a breakup, at least immediately. But there are a lot of things in there that look like bad news. I'm keeping list of points for Microsoft and against, and right now -- I'm only on Page 60 -- the list against is far longer than the list for.

The main problem, it seems, is that the court has affirmed that Microsoft is a monopoly and has stood ready to use its monopoly power to squash its competitors. This represents a threat to Microsoft because of the private lawsuits. They'll come looking for damages, and Microsoft will spend all of its time in court.

The best part for Microsoft is [Judge Jackson's] comments. That seems to be the main reason that they set aside the remedy. They don't seem to have set it aside because they believe it was undeserved. Rather, it was the comments of the judge and because he failed to give them a hearing.

Stephen Margolis, author (with Stanley J. Liebowitz) of "Winners, Losers & Microsoft: Competition and Antitrust in High Technology" and professor of economics at North Carolina State University:

The court reaffirms its previous position that if the tying [between the operating system and the browser] offers a plausible benefit to consumers of combining the two goods that can't be achieved by offering them separately, then the technical tie does not violate the law.

I think that the liability finding that is being maintained by this court is not sufficient to justify a breakup.

This new administration has a more laissez-faire attitude [and will likely] be more amenable to negotiation. The Microsoft case didn't separate cleanly on Republican/Democrat lines, and there's no reason to think that the current administration is uniformly pro-Microsoft. It's less of an interventionist administration.

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I think that at least some part of the Jackson findings would be changed and that would give the government the opportunity to pursue something more moderate. I'm fairly confident they'll avoid the breakup.

What I have read is very well reasoned. It's also very nicely written. Non-lawyers can read this and understand.

The court leans on Netscape's usage share, saying that Microsoft's actions to reduce Netscape's usage share would protect Microsoft's monopoly. In fact, all that's required for Netscape's ability to succeed as middleware is its ability to distribute itself. Netscape was widely distributed. In short, I think relying on usage share is incorrect.

You could quibble here and there, but the monopoly maintenance was the government's strongest part of the case. The tying issue (of the browser to the operating system) is, for an economist, the most interesting. The weakest part was the monopolization of the browser, which they've thrown out.

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Bob Levy, senior fellow in constitutional studies at the Cato Institute in Washington:

It's certainly good for Microsoft to get Judge Jackson off the case. His reputation is now tarnished. His career was done anyway just because of his seniority status, although this certainly is no way to go out. He deserves what he got. The court seemed to focus on his behavior from the remedy hearings on, that he engaged in improper contacts with the media, criticizing Bill Gates and Microsoft attorneys, and making statements the court found impolitic and not displaying proper legal temperament.

Legally, one of Jackson's problems was he didn't give one minute's worth of hearings on remedy. He didn't allow Microsoft one minute in the courtroom to argue his solution was Draconian. Legally, his remedy wouldn't have survived in any event.

Bill Gates' reputation is still in limbo. This entire case hasn't helped him. This is a victory for Microsoft but certainly a partial one at best. The appellate court did reverse part of the District Court's handling of the case, which helps Bill Gates' image. But on the gut matter, whether Microsoft is violating antitrust laws, there's not much change. So it depends on your baseline.

Eben Moglen, professor at Columbia Law School and counsel to the Free Software Foundation:

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It's not very nice news for Judge Jackson, who is treated very roughly in this decision. But if it's bad news for Jackson, it's much worse for Microsoft. This is now the case that never ends. They have to go to the Supreme Court. They cannot accept this remand and accept the finding that they had a monopoly and illegally maintained it. That turns the findings of fact into collateral for anyone who wants to sue. They have to seek review.

And unless they succeed in convincing the Supreme Court that the appeals court misread antitrust law -- and again that won't be easy; this is a court that's favored Microsoft in the past -- they're back in the district court arguing about remedies. And while the remedy may not include breakup, which is possible because it may look quite worse in two years, breakup will still be on the table.

The real point of course is that while Microsoft is fighting the ruling, time is going by. And what are they working on? .Net, which is an attempt to use the operating system to lock up even more features. That's a hard business strategy to be pursuing when an appeals court has already ruled that you've illegally held onto your monopoly.

Then there's the war on free software, which looks a lot like anticompetitive practices. So the gist is that Microsoft doesn't have the freedom of action, and they need that. They need .Net to work and they'll have a hard time doing it now. This decision changes the way Microsoft works.

Eric Raymond, author of "The Jargon File" and evangelist for open-source software:

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Governments just don't move as fast as markets, even if you believe that government intervention is justified, and I don't. They [Microsoft] already got what they came for. What's Netscape Navigator's market share now?

I think hackers in general have always suspected that what the government did would turn out to be irrelevant. But it's also worth noting the way that the initial media reaction to this is missing a few key points.

One is that the appeals court actually affirmed the findings of fact, the finding that Microsoft has abused its monopoly power. The only thing that got returned was the specific remedy. The obvious consequence is that we're simply going to have another judge reasoning from the same findings of fact to develop a remedy. The un-obvious consequence, and the reason you don't see the Microsoft executives jumping for joy, is that anybody who wants to mount a private antitrust lawsuit against Microsoft now has an open-and-shut case.

Now this is something that knowledgeable commentators pointed out six months ago, which is that even if the appeals court overturned Jackson's findings of law, it would be very difficult, procedurally, for them to overturn his findings of fact. In effect, what the appeals court has said is "Well, we accept Jackson's findings of fact; what we don't accept is his specific remedy."

The real problems that Microsoft faces are problems that are basically irrelevant to how a government court rules. Prominent among these problems is the fact that Microsoft's entire business model is sustained by fat margins in the hardware market. As those margins erode what's happening is it's becoming more and more difficult for OEMs [original equipment manufacturers] to justify paying [for Microsoft's OS]. It makes sense if you're buying a machine and your price is 2,500 bucks, then, OK, fine. Paying 80 bucks to Microsoft for the right to install Windows, well then fine. But when the prices get down to $500-$600, which is where the aggressive prices for machines are nowadays, $80 is beginning to look significant. and when you get down below $350, you just can't make any money on the Microsoft tax anymore.

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The hardware market is changing in such a way that Microsoft's model is looking less and less attractive. And Microsoft is demonstrating in its behavior that it knows this. The recent moves about .Net and all this stuff about talking up cross-platform operability and so forth, these don't make any sense unless Microsoft believes that its packaged software business is not long for this world.

James V. DeLong, senior fellow, Project on Technology and Innovation at the Competitive Enterprise Institute:

Overall, the court's decision in the Microsoft case is a victory for the company and the high-tech industry as a whole. In rejecting Judge Jackson's quick-trigger-finger decision to break up Microsoft, the appeals court emphasized that the remedy of a breakup should be a rare beast in antitrust, and that the usual response should be an injunction against illegal conduct, not vivisection without benefit of anesthetic. Today's decision is a win for the entire industry because it says courts should not meddle at random with business structure.

Ken Wasch, president, Software and Information Industry Association:

I don't understand how they can say that this is a victory for Microsoft. [Microsoft] didn't get the death penalty, but the conviction was upheld.

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Judge Jackson made a mistake in not holding a hearing in the remedies phase. I think he should have done it; I think most people think he should have done it, and now it's going to be ordered. But I don't think a breakup is off the table by any means.

The court of appeals affirmed Judge Jackson on a range of findings of fact and on monopoly maintenance and it's up to a new judge to determine what remedy will correct these violations. It's by no means clear that conduct remedies alone will ever work.

Stephen Houck, former lead trial counsel for plaintiff states suing Microsoft, and a partner at Reboul, MacMurray, Hewitt, Maynard & Kristol:

It's a very significant victory for the government. The judges held up the monopolization claims, which were really the meat of the case.

As for the state attorney generals, they've always been in the forefront of the effort to get some practical relief that will impede Microsoft's actions. This will strengthen them in that motivation. This gives them plenty of ammunition. Of course, if Microsoft settles [with the Department of Justice], the states will continue to be a party [to the settlement]. It's possible that the settlement -- and this is all speculation -- could offer relief that will be acceptable to both to the states and the federal government. But the states will continue to impact the resolution and this decision does support them if they determine that the federal relief is not adequate.

The decision will buy Microsoft some time. It will likely embolden them to turn the screws on a few critical competitors -- and for those competitors, it may be the difference between life and death. For the long term, though, I'm still placing my bet on the market and the deep technological changes that are happening right now to take away Microsoft's monopoly. I don't believe that they will enjoy the stranglehold on the "Internet operating system" that's now being built that they have enjoyed in the desktop operating system. .Net is a bold move, but there's enough suspicion of Microsoft that it will need to be more open than Microsoft operating systems have been in the past, or it won't get enough traction. Meanwhile, Linux and Apache continue to put a lid on Microsoft's penetration on the server side.

The other point I'd make is that the industry has moved on from the events that were the focus of the case. The damage has been done, and all the king's horses ... Netscape is no more.

And while it's true that the same kind of monopolistic behavior -- bundling apps with the OS to cut the legs off competitors -- that led to the demise of Netscape is still going on (e.g. Windows Media Player vs. RealPlayer), the basic shape of the industry has changed. We're no longer talking about a world in which the desktop is everything that matters. Current applications are network-centric, involving a web between servers and clients not only on desktops but also on non-PC machines such as handhelds, cellphones, game machines, etc. And Microsoft has monopoly market share only on the PC client, with significant competition in servers (where Linux/UNIX are increasingly strong) and non-PC devices. In short, while Microsoft does have some strong advantages, but I'm no longer sure that they are in a monopoly position, which is what mandated a higher level of care on their part (and scrutiny).

The real question is not whether Microsoft is hyper-competitive or not. It's clear that they are, and that sometimes their desire for total world domination is counterproductive for the whole industry. But this hyper-competitiveness goes over the line into illegality only if they do in fact have a monopoly.

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I guess they still do have a monopoly on desktop clients -- and as a result, it would be great to see some restrictions on their ability to use that monopoly in anticompetitive ways -- but we have to remember that the desktop is less of a power base than it was a few years ago.

Stephen Manes, Forbes columnist and coauthor of "Gates: How Microsoft's Mogul Reinvented an Industry -- And Made Himself the Richest Man in America":

From a very brief reading of the decision, it looks as though the appellate court has said that the judge in the case was a bozo and that the defendant was still a crook. That sounds about right to me.

Microsoft is clearly engaged in behavior that the law says is illegal and the judge is clearly engaging in behavior that was not conducive to having his actions upheld on appeal.

I would say that this could be just the beginning. Microsoft clearly has a monopoly on the application market which has not been dealt with. The fact that their monopoly position is established [in this ruling] might make it easier for someone in the future to make the case that they have a monopoly in the application market as well -- not only in Windows, but on the Mac platform.

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And their attempts to charge more for their applications in the corporate arena might be further evidence of that monopoly. They might be subject to private antitrust suits.

John Heileman, author of "Pride Before the Fall," an account of the Microsoft antitrust trial:

I'm being cautious because, having seen the TV coverage, it sounds to me like everyone is talking through their hat. It sounds like everyone is saying it's a victory for Microsoft because the breakup was remanded.

The big question is on the substance of the ruling. And of the three rulings, the one that was most important was section II -- the attempt at monopoly maintenance -- and it sounds like the appeals court has upheld that opinion. And that's a huge victory for the government.

Jamie Love, director of the Consumer Project on Technology:

It's sort of surprising. It's a bad day for Jackson and Microsoft. They're nailing Microsoft for everything! Microsoft's copyright defense [the idea that Microsoft has the right to self-determination because of copyright law] -- they completely reject that. The commingling of code? That's gone too.

This decision will breathe a lot of life into the notion of antitrust law applying to the Net. The judges have taken on a lot of tough issues, and they've upheld the law. What this means is that a competitor or the government can challenge Microsoft. Microsoft does have some victories in here, like they reverse the court on Java, for example.

It's not a 100 percent victory, but I'd have to say it's more of a defeat for Microsoft than anyone expected. Everyone thought that Jackson put the whole case in jeopardy but [the court of appeals] salvaged his heavy lifting, his finding of fact, and they've basically just said "redo the remedies phase." The case is in much better shape than anyone thought it would be -- and since the state attorney generals are in the case, the Bush administration has limited powers to go the other way.

Bob Crandall, a senior fellow at the Brookings Institute and former consultant to the antitrust division of the Justice Department:

I don't think it surprised many people. I think everyone assumed that it would come back because of the lack of due process in the phase of ordering the breakup.

Obviously none of us have read the decision yet, but it look as if the decision reversed on the remedy, but not on the violation of section II [of the Sherman Antitrust Act, which prohibits the abuse of monopoly power] I think that Microsoft might have expected even more. They might have expected to win on some of the findings on section II. Apparently, the appeals court did not overturn that, it simply overturned the procedure and the ordering of the breakup.

It's not clear yet what's going to happen because it's still possible that both sides will appeal to the Supreme Court -- the government might appeal the finding on the decree and Microsoft could well appeal the finding on the rest of the case. There's still a possibility that it goes to the Supreme Court and then it comes down to the appropriate proceeding in a district [court].

The speculation is that there could be settlement discussions right now in which the government and Microsoft could agree on a settlement. We don't yet have much indication of the new administration's antitrust policies, but I think it's safe to say they would be much less activist than the antitrust division of Joel Klein under Clinton. It might be that the administration would like to settle it out and get it out of the way, but I don't know that.